Income Taxes

Malibu Boats, Inc. is taxed as a C corporation for U.S. income tax purposes and is therefore subject to both federal and state taxation at a corporate level. The LLC continues to operate in the United States as a partnership for U.S. federal income tax purposes.

Income taxes are computed in accordance with ASC Topic 740, Income Taxes , and reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities and the corresponding income tax amounts. The Company has deferred tax assets and liabilities and maintains valuation allowances where it is more likely than not that all or a portion of deferred tax assets will not be realized. To the extent the Company determines that it will not realize the benefit of some or all of its deferred tax assets, such deferred tax assets will be adjusted through the Company’s provision for income taxes in the period in which this determination is made.

On December 22, 2017, the Tax Act was enacted which, among a number of its provisions, lowered the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018. The Company's statutory tax rate for fiscal year 2019 is 21% as a result of the change in statutory rates. For fiscal year 2018, we recorded an increase to income tax expense of $44,500 for the remeasurement of deferred taxes on the enactment date and the deferred tax impact related to the reduction in the tax receivables agreement liability.

The components of provision for income taxes are as follows:



	Fiscal Year Ended June 30,
	2019			2018			2017
Current tax expense:
Federal	$	11,240		$	10,111		$	6,094
State	3,368			1,758			1,134
Foreign	725			756			788
Total Current	15,333			12,625			8,016
Deferred tax expense:
Federal	5,336			51,358			9,132
State	1,609			(5,369		)	615
Foreign	(182		)	(196		)	(170		)
Total Deferred	6,763			45,793			9,577
Income tax expense	$	22,096		$	58,418		$	17,593

The income tax expense differs from the amount computed by applying the federal statutory income tax rate to income from continuing operations before income taxes. The sources and tax effects of the differences are as follows:



	Fiscal Year Ended June 30,
	2019		2018		2017
Federal tax provision at statutory rate	21.0	%	28.0	%	35.0	%
Change in federal statutory rate	—		36.2		—
State income taxes, net of federal benefit	4.4		3.9		3.4
Permanent differences attributable to partnership investment	(0.8	)	(0.1	)	0.4
Section 199 deductions	—		(1.2	)	(1.4	)
Non-controlling interest	(0.9	)	(1.0	)	(1.9	)
Change in valuation allowance	—		(0.4	)	1.1
Other, net	0.4		—		(0.4	)
Total income tax expense on continuing operations	24.1	%	65.4	%	36.2	%

The Company’s effective tax rate includes a rate benefit attributable to the fact that the Company’s subsidiary operated as a limited liability company which was not subject to federal income tax. Accordingly, the portion of the Company’s subsidiary earnings attributable to the non-controlling interest are subject to tax when reported as a component of the non-controlling interests’ taxable income.

The components of the Company's net deferred income tax assets and liabilities at June 30, 2019 and 2018 are as follows:



	As of June 30,
	2019			2018
Deferred tax assets:
Partnership basis differences	$	69,632		$	73,812
Fixed assets and intangibles	—			5
Accrued liabilities and reserves	428			391
State tax credits and NOLs	3,902			2,938
Foreign tax credits	761			—
Acquisition costs	6			—
Other	337			35
(Less) valuation allowance	(14,252		)	(12,716		)
Total deferred tax assets	60,814			64,465
Deferred tax liabilities:
Fixed assets and intangibles	545			687
Other	7			14
Total deferred tax liabilities	552			701
Total net deferred tax assets	$	60,262		$	63,764

On an annual basis, the Company performs a comprehensive analysis of all forms of positive and negative evidence to determine whether realizability of deferred tax assets is more likely than not. During each interim period, the Company updates its annual analysis for significant changes in the positive and negative evidence. At June 30, 2019 and 2018, the Company concluded that $14,252 and $12,716, respectively, of valuation allowance against deferred tax assets was necessary. The Company continues to record the valuation allowance on state net operating losses generated by current and future amortization deductions (with respect to the Section 754 election) that are reported in the Tennessee corporate tax return without offsetting income, which is taxable at the LLC. These net operating losses have a 15 year carryover and will expire, if unused, between 2030 and 2034. Additionally, a valuation allowance was recorded related to a foreign tax credit carryforward that is not expected to be utilized in the future.

Unrecognized tax benefits are discussed in the Company's accounting policy for income taxes (Refer to Note 1 on Income Taxes for more information). The Company has filed federal and state income tax returns that remain open to examination for years 2016 through 2018, while its subsidiaries, Malibu Boats Holdings, LLC and Malibu Boats Pty Ltd., remain open to examination for years 2015 through 2018. The Company closed the IRS examination of its June 30, 2015 return during the fourth quarter of fiscal 2019, resulting in an immaterial adjustment to its tax liability.

A reconciliation of changes in the amount of unrecognized tax benefits for the fiscal years ended June 30, 2019, 2018, 2017 is as follows:



	Fiscal Year Ended June 30,
	2019			2018		2017
Balance as of July 1	$	329		$	113	$	66
Additions based on tax positions taken during the current period	1,216			216		47
Reductions for settlements with taxing authorities	(144		)	—		—
Balance as of June 30	$	1,401		$	329	$	113

In fiscal year 2019, the Company settled $144 related to the fiscal year 2015 audit in connection with inventory subject to Internal Revenue Code Sec. 263A. Also in fiscal year 2019, the Company recorded $922 in connection with its state tax filing positions. As of June 30, 2019, it is reasonably possible that $398 of the total unrecognized tax benefits recorded will reverse within the next twelve months. Of the total unrecognized tax benefits recorded on the balance sheet, $1,103 would impact the effective tax rate once settled.

As discussed in Note 1 to the Consolidated Financial Statements, our policy is to accrue interest related to potential underpayment of income taxes within the provision for income taxes. At June 30, 2019, we had $157 of accrued interest related to unrecognized tax benefits.

The Company did not provide for U.S. federal, state income taxes or foreign withholding taxes in fiscal year 2019 on the outside basis difference of its non-U.S. subsidiary, as such foreign earnings are considered to be permanently reinvested. The estimated income and withholding tax liability associated with the remittance of these earnings is nominal.